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Mid-2005 TPA Industry Report

By SPBA President Fred Hunt

For a quarter century, I have been writing an annual State of the TPA Industry & Forecast for the upcoming year.  It normally comes out at the turn of the year. It is worth doing a quick read of past years', because most of what is said is still applicable and accurate. 

In some years, events or opportunity lead to an additional mid-year report.  This year, a magazine submitted some excellent questions as preliminary background for a feature story about the TPA industry.  We always emphasize that the "simple" facts about TPAs and the marketplace can not be understood unless the many nuances are comprehended.  So, the answers below are far more thorough than will ever appear in an article.  However, I hope it will give the magazine the inside scoop, and also be a useful review for you, and perhaps an orientation for new staff.

>>>>Is the TPA industry growing, and if so, how?  Yes, we can tell it and see growth, but all of our normal measuring standards are no longer applicable, such as number of firms, number of lives, and income.  (This is an example of the important  rule that every number or statistic in the benefits, insurance & medical arena has a built-in 1,000% distortion factor, not because anyone is lying, but because the interpretation of even the simplest vocabulary terms is vastly different.  So, people who think they are referring to the same thing actually mean drastically different things.)

The way we can tell there is growth is threefold:  First, when there are mergers, the acquired TPA office does not close down, as happens in some industries.  So there is not a shrinkage in market size from mergers & acquisitions among TPAs.  Second, there is a constant flow of new TPAs, often started as diversification or "if you can't beat 'em, join 'em" independent-operating divisions of insurance companies, HMOs, medical entities, etc. etc.  Third, we also have a smaller, but steady flow of TPA entities who have decided to expand into the comprehensive-services market type of TPA that SPBA serves; and/or entities who have decided to actually form TPAs from scratch or building from previous services they provided. 

So, there is solid steady growth.  We just don't know how to label it.  In recent years, we have seen the number of firms that merge are offset by the number of new firms of the types described above.  So membership remains steady at about 400 comprehensive-service TPAs.

>>>>What's the impact of consolidation of TPAs?  We have not had the massive kind of consolidation that has hit many industries.  There have always been those hoping to become the McDonalds of TPAs, but being everywhere and providing the intimate sense of personalization (more on that later)  just don't seem compatible.  Frankly, SPBA's biggest concern and role about mergers is "marriage counseling" to be sure that it is going to be a happy and productive union.  Some of the hurried "marriages" in the past came out badly.  TPAs are so individualized and provide such personalized services that anyone merging with or buying into the TPA industry has to "get it" about the role & style of service each TPA gives. So, it truly is like counseling individuals bringing their personal traits and different backgrounds into a marriage.  I spend a significant percent of my time being marriage counselor between existing TPAs and also counseling buyers eager to (sometimes blindly) jump into the TPA environment.

Because TPAs saw or heard of unfortunate early matches, and because selling a TPA is like putting their baby up for adoption, the TPA industry does not have lists of TPAs for sale. It is discreet word of mouth.  Often, the best TPA  mergers & buy-outs start and progress the same way that human marriages emerge from two people who chance to meet, and realize that they have a lot in common.

>>>>What's the impact on SPBA and the TPA industry of entities with connections to former competitors of the TPA concept and/or from other outside entities such as medical, financial and other businesses?  Frankly, we worried about that.  SPBA members often refer to the association as "family" and there has always been a special mindset and spirit in the industry.  Would an influx of people from different backgrounds shift that style?  Let me answer with a true story.  At the Spring 2005 SPBA meeting, we had an especially large influx of such new members...people who were new to SPBA and new to the unique style of SPBA meetings, and who came from very different corporate backgrounds and prior associations.  I alerted the Board that we might need to show these new people the SPBA way.  Well, about 2 minutes into the Chairman's opening remarks (which he gave, with the large number of first-timers in mind), everyone in the room was a dyed-in-the-wool old-timer.  People who enter the TPA industry and embrace it quickly "get it".

>>>>How are Taft-Hartley TPAs doing in that shrinking market?  Yes, the T-H market is about half as many workers as 25 years ago.  However, there are good plans out there to keep the 100 or so TPAs who specialize in that market busy.  Some T-H TPAs have also found themselves solicited to take on benefits for state/local governments & subsets, jails, and other kinds of plans & coverage where the skills & experience from T-H are very useful.

>>>>What do TPAs bring to the table and how do they distinguish themselves?  PERSONALIZED SERVICE, with the added increasingly-appreciated bonus of practical government compliance expertise & application.  SPBA's TPAs have become the one-stop-shopping for client plans & employers to design, consider financial factors, administer on a day-to-day basis, and steer through the minefield of government rules.  So, the TPA of today has come a long way from the old image of just a claims processor.  Today, TPAs are probably the most broadly informed players in employee benefits.  (More later about different kinds of entities which claim to be "TPAs".)

>>>>Are there any problems because TPAs have evolved this way to play such a comprehensive role?  Yes; TPAs are like protective parents about their client plans. So, they tend to selflessly give and do whatever is needed to solve or avoid problems, just like a parent does.  A parent rarely gets paid for such devotion, and too often TPAs tend to give away priceless services & expertise for free.  TPAs need to find a way to educate clients on the true value of the range of services & expertise they routinely receive.  That's hard, because most TPAs don't feel comfortable bragging about themselves.

>>>>What are the trends in bundling versus unbundling how TPA services are contracted?  Whether TPAs bundle or unbundle the services & pricing is individual preference.  Personally, I suggest unbundling (what I call an a la carte menu).  Because I talk to hundreds of TPAs every year about their experiences, I've been taught by the experts.  There is both a legal and practical reason for unbundling TPA services.  What constitutes the broad term "administration"?  It doesn't precisely define who is agreeing to take on the duties of Form 5500, COBRA, etc.  Because there are so many pieces, and so many laws triggered, and so many optional services (sometimes purchased from yet other vendors), I feel the client is best served if the specifics are all delineated.  Also, from an ERISA perspective, TPAs are only empowered to do as much or little as formally delegated.  So, the more specific that list of delegated duties, the clearer it is for DOL overseers.  On the other hand, in some kinds of plans and client relations, a totally bundled format is fine.

>>>>How are TPAs handling government compliance?  Government compliance is probably the biggest service TPAs provide to clients.  Every claim that comes in and every word in the plan document, and every decision about the operation of the plan has a government compliance impact....often with potentially huge liability.  Consequently, since SPBA's founding in 1975, knowing, understanding and shaping government compliance rules is the major role TPAs wanted from their association.  Also, since TPAs are involved in the very practical rubber-meets-the-road aspects of government compliance, SPBA is rare in its focus on the nitty-gritty regulatory requirements and works in a non-partisan behind-the-scene way.

Fortunately, SPBA has fallen into a pattern that works well towards that goal.  We get about 10,000 questions & insights from our members every year about real-world situations facing their client plans & employers and plan participants.  That tells us what's TRULY going on in the marketplace.  Meanwhile, government policy shapers & regulators feel comfortable brainstorming with SPBA about those problems...and how to avoid them or fix them.  Many of the government officials welcome hearing from SPBA or our members directly about such real-world situations. The government officials also have a comfort level floating ideas with us.  Many a bad idea has disappeared that way.  Not only has SPBA earned a reputation for absolute candor and knowing our members and the market, but SPBA is unique in representing every size & format of employment & plan.  So, it is a win-win for both TPAs who need real-world answers for clients (and faster than the normal process would provide), as well as for government officials who want plans to achieve their goals smoothly.

>>>>What's the difference in government compliance expertise & value of TPAs compared to consultants and various professions that serve employee benefit plans?  It is a practical difference.  First of all, most of the professions subdivide and educate themselves along specialty lines, such as tax law, labor law, health law and various specialty types of accounting and actuarial.  On the other hand, TPAs must understand how ALL the pieces interact (and sometimes conflict) with each other.  So that situation automatically gives TPAs a valuable big-picture focus.  Also, since TPAs will be living on a day to day basis with the ramifications of compliance policies and procedures (as differentiated from an attorney or consultant who provides advice and then moves on), TPAs focus on all the nitty-gritty and real-world factors.  It is awareness of and preparedness for the nitty gritty that more successfully guides the client through the minefield of government compliance.  Courts recognize this difference, which is why advisors are generally not subject to ERISA fiduciary responsibility, but TPAs are recognized as having discretionary powers.  (None of this should in any way say that TPAs are practicing law or any other profession without a license.  TPAs simply use the information available in the employee benefits arena in which the situation is either that there is no formal official final specific  guidance or it is "depends on facts & circumstances". 

Finally, TPAs have two practical hands-on advantages.  First, because they are working with a client plan day in and day out, they have the hands-on knowledge of the history and any idiosyncrasies of that plan.  Second, because the TPA has other clients probably of similar type or similar geographical location, he knows in real-time what government is saying or doing to similarly-situated plans.  What's that worth?  Well, SPBA had one of the largest employers in the US repeatedly  try to join SPBA.   I would repeatedly explain that they were a self-administered employer plan, not a TPA, and thus not eligible.  They kept trying.  I finally asked a friend who was a Senior VP & Counsel of the company what was going on.  He candidly said, "Fred, every time we get something from the government or feel alarmed or curious about something we read in the news, we spend $100,000 on lawyers, consultants, and specialists to advise us if this is something unique to our plan or company, and what does it mean in the big picture of other laws and agencies.  It happens all the time. On the other hand, even your smallest SPBA TPA can call and get those answers in a few minutes for free."

>>>>What's the role & impact of niche services in the TPA industry?  First, we need to define the term "TPA".  There are many entities which like to call themselves "TPAs".  (I'm only talking about employee benefit TPAs.  There are some P&C and some specialized-WC TPAs, but they do not seem to have an association or cohesiveness.  There are also some firms doing TPA services, but calling themselves Administrative Services Only - ASO.  It's not a large group, so I don't differentiate them here.)

SPBA's target membership are TPAs who provide a comprehensive array of services.  That doesn't mean all kinds of services to all types of client plans, but TPAs who provide and/or arrange a whole package for clients. (More on that later).  SPBA's membership is about 400+ TPA firms.

There are also about 1,000 entities out there who do TPA services...but only for one or a few types of coverage (dental, vision, Rx, or 401k, etc.).  We discourage those firms from joining SPBA, because our range of issues & services (and thus dues) far exceeds the limited areas from which they would benefit.

There are also a couple thousand of what I call "TPAs of convenience".  These are individuals and firms that like the look of the term "TPA" on their professional resume.  These include some insurance agents, brokers, consultants, computer processing firms, etc.  When such firms call me, I let them brag how they are the biggest, best, most advanced, etc. etc. TPA in the country.  Then I casually bring up some question about the latest requirement, liability, or government compliance issue.  Wow! It is then like a locomotive going from full-speed-ahead to a screeching full-speed-reverse as they sputter why they aren't REALLY a TPA and various other doubletalk undercutting all the bragging they just did.  So, any client should be very clear about what kind of "TPA" is being considered.  There's a lot of loose talk out there.

Even among SPBA's comprehensive-service TPAs, there have always been specialties.  TPAs tend to divide themselves by the types of client plans in which they specialize, such as Taft-Hartley, Single employer (big & small), and Government & Church sponsored.  Over the years, TPAs have also explored and implemented specialized services & features which will better serve the clients with the level of personalization the client expects.  So there are specialties, and there are TPAs who develop or arrange new specialized extra services, but there are no "niches" in a clique sense.  TPAs simply provide what their market wants & needs.

>>>>What are the impacts & trends of technology among TPAs?  Technology is a double-edged sword for TPAs.  Obviously, anything that makes a TPA's services faster and more cost-efficient is a good thing.  On the other hand, the key to success of TPAs is personalization personalization personalization.  So ANYTHING that makes a client feel that there is less of the very individualized attention becomes a serious treat for the future of a TPA.  So, it is a very thin and delicate line between applying cutting-edge technology versus seeming less personalized.

>>>>What's the impact of HSAs, Consumer-Directed Health Plans, etc.?  SPBA was fortunate to have been invited by the White House to quietly brainstorm the Consumer-Directed and related concepts in the years before anyone knew anything was brewing.  As usual, our SPBA's role was to be a voice for the very practical issues of what works and doesn't work in the real-world marketplace, and with the flukes of human psychology well in mind.  SPBA continued that role helping to shape the regulations and point to areas that would need guidance.  In fact, one of the main reasons that Consumer-Directed plans are growing in the employee benefit arena more than their original individual-market format is due to the role of SPBA.  So, SPBA's TPAs have had the most intimate access to insights to enable them to create and run all of the new kinds of plans for clients. (Note: We are all still pioneers in CDHPs.  Lots of things will need time to really gel.)

>>>>Are TPAs out there aggressively selling the new kinds of plans (or new specialty services or new technology) to clients?  Not in a super-salesman sense.  In some markets and types of clients, HSAs, HRAs, and other new products & developments may fit well, and TPAs serving those markets have been quick to get up to speed.  Other marketplaces and types of clients are in a wait-and-see mode. In some areas it depends on how the local broker community feels about new things.  In any case, demand and providing of services is very customer-driven.

>>>>What issues come into play with multi-nationals?  The answer is multi issues and considerations, because the legal or best answer depends on individual factors such as location of the employer entity, citizenship status of the worker(s), and the preferred type (and cost factors) of coverage the workers and employer want...and all within the applicable laws and rules of the country or province.  SPBA TPAs handle each situation on a case-by-case basis to determine the most personalized best solutions.

In 2004, SPBA welcomed the birth of a new sister (totally independent), the TPA Association of Canada (TPAAC).  While the US & Canadian health systems are totally different and thus it may appear that there are few issues in common, we are learning from each other, and it means that TPAs in both associations have a network of friendly experts across the border to help them figure out the rules and come up with personalized solutions for their clients.   So, while TPAs would modestly say that they aren't "experts" in multi-national situations, they do a good job when faced with a situation.

>>>>What about off-shore out-sourcing for TPAs?  I've had 154 proposals and presentations from providers of off-shore services.  On the one hand,  cost-savings would be welcomed by TPAs.  However, TPAs have held off for very practical & legal reasons.  The big issue, as with so many other things, is preserving the feeling of the client that the TPA is providing extremely personalized and hands-on services.  Even in many mergers of TPAs within the US, clients get miffed that "outsiders" are now involved in the cozy process they liked before.  The out-sourcing vendors say that only "mundane" duties would be out-sourced.  However, in a modern TPA, there is no such thing as "mundane".  Even the person who opens the mail and does data entry is performing vital government compliance judgments & duties.  In many TPAs, the staff doing "mundane" duties are also the first-line of customer service.  Legally speaking, there are many unanswered questions.  First, of course, is that self-funded & ERISA plans are legally different than insurance companies.  Insurers own the money that will be used to pay claims.  TPAs and plan sponsors are guardians of entrusted plan assets.  That's a giant difference.  There will need to be a track record of IRS, DOL & HHS regulatory decisions to see their mood towards offshore sub-contracting of administrative duties.  No TPA or plan wants to be the test case for the government in this arena.  Second, rumblings from state TPA-licensing officials do not sound comfortable with such sub-contracted basic services.  Third, several Stop-Loss sources say that they do not want to provide coverage to plans using such off-shore outsourcing, because they don't have a comfort level with the option to audit claims.  Finally, there is the question & concern of how US and/or state laws such as HIPPA privacy could be enforced in another country.  Since TPAs are very precise about keeping their clients closely compliant with laws & regulations, these concerns are warning signals.

So, the TPA industry is alive and well.  Yes, there are challenges and very stiff competition, currently from large insurers.  However, we've been through those kinds of challenges before (like managed care in the early Ô90's), and always emerged even stronger.  There have been about 200 private market studies of the TPA industry in the past few years.  I am normally consulted in those processes, and I am brutally candid.  Because they are private, I haven't gotten to see or read the studies, but I am told that each came up with glowing projections for the future of the TPA industry.  Why?  --Because TPAs give personalized client-centric service (which is always a popular product), --TPAs have become the best-informed source of government compliance information that crosses the normal specialties (such as tax law, labor law, health, Medicare, etc.). --TPAs will always be survivors, because they are flexible and innovative.  --Even the way TPAs have designed and maintained the format & role of SPBA has been praised. .  One study described TPAs as "the golden goose".  That's a bit optimistic, since I don't know of any TPAs wallowing in golden eggs.  However, the strengths of the TPA industry consistently identified in the independent studies are true and point to a positive future.

Let me end with a sincere thanks to SPBA's Board members and Past Chairmen...and also to each and every member.  You notice over and over in this report that the strength & success is because SPBA members are willing to share their problems, share what works, and share their real-world experience.  We get about 10,000 calls, faxes, and e-mails per year from members.  The Board & Past Chairmen are asked by e-mail, sometimes multiple times a week, for insights based on their experience in the industry & marketplace,  They constantly are "on duty".  The success of the TPA industry and SPBA is due to all these factors.  THANKS!